Option Investor

Portfolio Review

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A Market With No Direction

Stocks moved in a small range Wednesday as investors weighed the effects of inflation on the economy and future corporate profits. The Dow Jones industrial average ended down 14 points at 10,456, while the NASDAQ and the S&P 500 index finished the session almost unchanged at 1,990 and 1,172, respectively.

While there was not much activity in the MCM Portfolio, a few of our readers commented on the movement in the PHLX Gold&Silver Sector Index (PHLX:XAU), which traded down another 2% Wednesday, closing at $93.92. As noted previously (3/21 Blog), the issue was expected to "reach our conservative loss-limit/exit point in the coming week" and it has declined steadily since that observation. Since the position was offered for traders who favor the trend in gold prices, we asked one of our long-time subscribers (who participated in the play) about the recent slump in gold and they suggested that it was primarily due to the rising dollar. Indeed, the dollar has moved decisively higher in the wake of a larger-than-expected rise in consumer prices and the FOMC's comments that it is growing "more concerned" about inflation.

Although the issue has declined more than 6% in only three sessions (quickly surpassing the recommended exit points for the spread), some analysts now believe the downtrend will continue in the near-term. Of course, the recent slump wasn't in the mainstream forecast two weeks ago but the current outlook bodes well for at least one of our new readers, who described his strategy (in an E-mail) to "leg" out of the spread with individual orders for each position. Regardless of the outcome, we applaud the independent analysis and decision-making the reader demonstrated as this is a fundamental trait of any successful trader. In addition, we hope our ongoing commentary and educational narratives will help other subscribers become more comfortable with a range of exit and adjustment techniques, so they can effectively manage their portfolios in a variety of market conditions.

Portfolio trades:

Wednesday's early rebound in Research in Motion (NASDAQ:RIMM) offered traders a great opportunity to exit the spread with no loss. While we did not specifically recommend closing the position, we hope some of our more conservative readers used the upside activity to their advantage. Looking forward, the near-term trend of the issue will likely be decided in the next few sessions as RIMM looks for buying support in a recent trading range from $74-$77. If investors fail to hold the share value in the mid-70s, there is little hope for a resumption of the bullish momentum in the coming weeks.

On the "watch" list:

Estee Lauder (NYSE:EL) - On Wednesday, the issue jumped $1.15 to $44.40, despite a lack of "public" news to explain the activity. While we are still not convinced the stock can sustain a rally beyond $46 without a substantial catalyst, today's brisk climb on moderate trading volume suggests somebody expects some upside potential in the future. Our intention is to stick with the spread a bit longer, but it is important for traders to determine their personal risk/reward threshold and initiate a loss-limiting strategy based on that price. Again, this could be: a "buy-to-close" limit order on the spread or the short option (triggered by the stock or the option price), a "covering" order using the stock or a more-distant call to offset the short option, or a "roll-out" order to transition to a different strike and/or forward to a future expiration date.

Chiron (NASDAQ:CHIR) - CHIR's share value continues to consolidate near a recent support level as investors ponder the likelihood of a profitable recovery from the 2004 closure of its flu vaccine plant in Liverpool, England. Our loss-limit/exit point has been adjusted lower, to the $34.50 range, to take advantage of the technical support near that price.

New plays:

There are no new plays at this time.

MCM Staff

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